Unexpectedly Intriguing!
December 21, 2006

With the BEA's finalization of the 2006 third quarter GDP figures last Thursday (available here as a 136KB PDF document), we thought it would be a good time to pull out our backward-looking crystal ball to forecast the future direction of the U.S. economy.

We, and you, can accomplish this task by taking advantage of our "Climbing Limo" GDP forecasting tool, which was inspired by The Skeptical Optimist. The method allows you to predict the level of GDP some three quarters into the future. All you need is the most recent history of GDP data, and maybe a wizard hat, and you're now just as qualified as any professionally-trained pundit to predict where the U.S. economy is going, and maybe even more so!

The following chart shows what we found after incorporating the latest data and, for good measure, shows the actual and forecast values of inflation-adjusted GDP going back to the second quarter of 2005, some two years before the latest quarter for which we've forecast data. The heavy green line represents the recorded inflation-adjusted (or real) GDP results, while the dashed purple line shows the level forecast by the "Climbing Limo" method:

If we assume that the "Climbing Limo" method produces good forecasts of future GDP levels, it would seem that the second quarter of 2007 will be pretty rocky following pretty good GDP growth in the current fourth quarter of 2006 and the first quarter of 2007. If we also assume that the sentiment of investors is motivated by such backward-looking generated economic forecasts (or is just informed by their recent experience), we would anticipate that the first quarter of 2007 will see a significant decline in the stock market, as they factor these expectations of lower future economic activity into their forward-looking investment decisions.

See? Anybody can do this! Maybe we should try our hands at astrology!

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

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